Investing In The United Kingdom 

Market Entry Strategy

The above challenges illustrate that cracking the UK market is not the “slam dunk” that many exporters often imagine:

• New entrants need a clear and sustainable competitive advantage, such as cost or product differentiation (quality, superior design, branding), to be successful.
• Market research is essential and well worth the investment. It should seek to determine market size and growth, key segments and trends, distribution and channel economics (margin structure), major competitors and their product positioning, pricing and promotion, and any market access or regulatory issues.
• While the U.S. and UK share many values and characteristics, U.S. exporters and investors must recognize that there can still be significant cultural differences.

Market strategies that may have been very successful in the United States could require adaptation or localization for the UK market. In general, partnering with an experienced and established local distributor is the optimum entry strategy. Visiting the country to meet potential partners and to understand the market first hand is highly recommended.

Using an Agent or Distributor

National laws governing the relationships between agent and principal, and distributor and supplier are broadly harmonized throughout the EU. EU Directives establish the rights and obligations of the parties to an agreement, the agent’s entitlement to commission payments, and the conclusion and termination clauses of agency contracts. In the case of EU agents and their non-EU principals, the law favors the agent to such an extent that most of those agency arrangements have been terminated in favor of reseller and distributorship arrangements. Although there are few instances that specifically require the use of a local lawyer, contracts and agreements should be vetted by a competent attorney or firm conversant with UK and EU Law. While contract coverage is often similar, specific clauses and language can be considerably different from that in the U.S. Standard American contracts should not be used, as they are mostly unenforceable under UK law. Many U.S. law firms have either established their own UK offices or have links with local practices, and are often the most convenient and practical sources of legal advice for American companies. The Commercial Service in London can provide lists of local law firms, including those with U.S. links.

Franchising

Franchising in the United Kingdom encompasses 718 systems, including 31,300 franchise units and employing 321,000 people. Key sectors include restaurants and catering, personal services, store retailing, property services, transport and vehicle services, and business and communications services. While the market experienced compound annual growth of approximately 11% in the late 1990’s, it has slowed considerably since then. From 1999 - 2004, average annual growth was a mere 0.5%. Thus, the UK franchise market could be reaching maturity. The key factors for franchise success are a proven concept: finding the right entrepreneur and arranging financing. The cost of entering this market can vary widely, with initial investments ranging from $18,000 to over $350,000. Franchisees often obtain funding from savings and family loans. Bank loans, however, are the primary means of financing with 85% of franchisees obtaining funds from banks. The total franchise investment is typically allocated as follows: franchisor (15%), franchisee (15%) and bank (70%). The current best prospects for U.S. franchisors include restaurants, particularly sandwich shops, health care, printing, retail, and business services. While there is no franchising-specific legislation in the UK, there is some EU legislation that prospective franchisors and franchisees should be aware of. Articles 81 and 82 of the EC Treaty prohibit, in certain circumstances, agreements, which prevent, restrict or distort competition. In the UK, anti-competitive behavior is prohibited under Chapters I and II of the 1998 Competition Act. These statutes highlight the effect of competition law on franchising, including the importance of avoiding restrictive and collusive pricing practices.

Direct Marketing

Affordable transatlantic telecommunications and the use of electronic payment methods for international transactions have made direct marketing from the United States popular. Public confidence in the accuracy of remote billing, data security, and delivery is growing at a time when the Internet is an increasingly accepted marketing tool. The rapid increase in the number of broadband connections has had a large part to play in this, making the online experience more interactive and offering much more scope for creative people working in this area.

More importantly, as audiences continue to fragment, marketers are finding ways of engaging with the audiences lost from one media channel who are more frequently likely to use the Internet. These factors combine to make direct marketing of many types of goods and services worth considering, and the enactment of the UK digital signature and data protection regulations have accelerated the use of the Internet as a sales medium. Further, such Internet direct marketing is a reasonable way for exporters to test UK market segments, although results should not be the only basis for proceeding with more significant marketing efforts.

U.S. web-based marketers should be aware of the EU Value Added Tax Directive that requires service providers to collect Value Added Tax (VAT) on sales of services to consumers over the Internet. The VAT is currently 17.5%. The EU Distance Selling Directive (97/7/EC) applies to most direct marketing activities. The legislation requires that consumers be given clear and comprehensive information about the vendor and the goods or services offered. The directive also gives the consumer the right of withdrawal within seven days without penalty and requires the vendor to refund any monies due within thirty days of an order's cancellation. The Advertising Standards Authority is the independent body set up by the advertising industry to police the rules laid down in the advertising codes. The strength of this selfregulatory system lies in both the independence of the ASA and the support and commitment of the advertising industry, through the Committee of Advertising Practice (CAP), to various standards and codes of conduct, protecting consumers and creating a level playing field for advertisers.

The Advertising Standards Authority (ASA) has established a code of practice for direct mail advertising and for list and database management. The Advertising Code can be found at http://www.asa.org.uk/asa/codes/. The Direct Marketing Association has done the same regarding direct selling. The industry code of practice for direct marketing can be obtained from the Direct Marketing Association at: http://www.dma.org.uk/content/Pro-Code.asp.

Joint Ventures & Licensing

Joint ventures may be formed as limited liability companies or as equal or unequal partnerships. Consortia of companies formed to bid or manage specific projects usually use a British-registered limited liability company as the vehicle, to more easily rent or purchase local premises and assets, and to hire and manage a local workforce and support staff. No ownership or control restrictions apply to joint ventures in the United Kingdom.

Selling to the Government

Most UK government departments and public bodies are subject to a range of EU procurement Directives and to the WTO Government Procurement Code, which gives qualified foreign bidders from signatory countries equal access to each other’s public sector contracts. Urgency or national security considerations can be used to justify procurements outside WTO rules. Intended procurements above the EU public procurement thresholds are published in the Official Journal of the European Union (OJEU), and in specialized industry-specific publications. Smaller procurements do not need to be published.

The Ministry of Defence (MoD) publishes information on its future projects and procurements in a biweekly Defence Contracts Bulletin, which is available to U.S. subscribers online (http://www.contracts.mod.uk/). Nonetheless, most U.S. defense companies require more lead-time than the bulletin provides, and need detailed guidance on the procedures and bid evaluation criteria used in this sector. To remedy this, the Embassy’s Office of Defense Cooperation (ODC) has prepared a handbook of unique insights and case studies in UK defense marketing for U.S. companies. The handbook is routinely updated to incorporate changes in UK defense procurement policy, procedures and organization.

The handbook is a briefing tool that supplements the practical advice that can be obtained directly from the ODC in London. This advice includes insight, guidance, and advocacy in support of U.S. defense contractors competing for sales and cooperative development programs for military equipment and services, including missiles and defense systems, munitions, sensors, ships, aircraft and helicopters. The ODC in London can be contacted on (tel) 011 44 20 7894 0737, (fax) 011 44 20 7514 4634, or odclondon@state.gov.

Larger defense contracts awarded to non-EU contractors require the negotiation of industrial participation (IP) i.e., offset arrangements. The IP arrangements are separate from the procurement contracts, but administered by the MoD’s Defence Export Services Organization (DESO). Further information and guidance on IP from DESO can be found at www.deso.mod.uk/ip.htm.

London will host its third Olympic and Paralympic Games in 2012. Billions of dollars will be spent to regenerate London’s East End and to transform it into an environmentally friendly and sustainable site for the various Olympic events. The Olympic Delivery Authority (ODA), which is responsible for delivering the permanent venues and infrastructure necessary for the games, will begin awarding contracts in 2007. This includes securing work on transportation and construction projects. The London Organizing Committee of the Olympic Games (LOCOG) will begin the process of awarding contracts in 2009. It is responsible for managing and staging the games, focusing on goods, services and other necessities.

Contract Procurement will be performed in accordance with European Union legislation, which is guided by the principles of transparency, proportionality and non-discrimination. The three principles are:

• Contracts to be advertised throughout the EU
• All enquiries receive equal treatment to avoid discrimination
• All tenders and award procedures must involve the application of objective criteria.

The ODA’s procurement policy lays out the standards by which the ODA will abide when awarding contracts. The official procurement policy will be available on the London 2012 web site once it is completed. In the meantime, a draft is posted on the London 2012 web site http://www.london2012.com.

For projects below EU procurement threshold values, companies are requested to express their interest to tender via the official London 2012 web site above. For work on larger contracts, businesses can expect to find opportunities through Tenders Electronic Daily (TED), the web site of the Official Journal of the EU http://www.ted.europa.eu/.

Distribution & Sales Channels

Dedicated sales and distribution channels, ranging from wholly owned subsidiaries of foreign manufacturers to independent trading companies that buy and sell on their own account, have evolved for most imported products and services. Between these two extremes are independent resellers, sales agents, and stocking distributors that have contractual relationships with their suppliers. The selection of an appropriate marketing organization depends largely on the nature of the goods and services involved. One recent channel marketing development, responding to the expanding requirements of international e-commerce, is the growth of local fulfillment and delivery/returns services.

Selling Factors & Techniques

EU law implemented by national legislation governs exclusivity in agency and supply agreements, purchasing contracts, and contract terms. U.S. manufacturers and exporters are generally able to appoint exclusive representatives and to determine the methods used to promote the sale of their products. Such exclusive territories are usually national in size. Sales practices that give regulatory concern are those that could give an unfair advantage to the supplier at the expense of competitors or end users. Recent legislation exempts some vertical agreements between manufacturers and their resellers, but requires the disclosure of certain types of inter-company commercial arrangements, and also gives powers of investigation and enforcement to the regulatory authorities.

Electronic Commerce

By the second quarter of 2006 some 130,000 UK businesses were selling online in a market valued at $16.4 billion a year. This represented about 2.5 per cent of all household spending during that period. In the last five years, Internet retail sales in the UK rose by over 350%, compared with growth of only 20% for all retail sales. In 2005, the typical online shopper spent $1,200 online, and forecasts suggest that this could grow to over $1,720 per year by 2010. Consumer concerns remain, however, about security of payment and potential problems with delivery.  The official language for the United Kingdom is English, so American firms will not have any language issues with indexing their sites.

A local domain is not essential. Indeed, many UK firms use the .com domain. If a U.S. company wishes to localize its site, the domain suffixes “.co.uk”, “.uk.com” and “.org.uk” are easily obtained. In order to qualify for a “.ltd.uk” and “.plc.uk” domain name, a company must be either a UK private (Ltd) or public (plc) limited company.

As a general rule, the Internet in the UK looks and feels identical to the U.S. Pop up ads are not prohibited, and indeed are quite common. As a result, many users turn on the anti-pop up features in their browsers. Spam is covered by the Privacy and Electronic Communications Regulations. In summary, the Regulations require UK or EU based businesses to gain prior consent before sending unsolicited advertising e-mails to individuals. This consent must be explicitly given on an 'opt-in' basis by individuals, except where there is an existing customer relationship. The regulations also require that the use of cookies or other tracking devices are clearly indicated and that people be given the opportunity to reject them. Spam is, however, a worldwide problem and there is little that regulators can do to prevent Spam originating from outside the EU. Many email systems have increasingly effective Spam filters.

The main rules covering sales on the Internet are the Consumer Protection (Distance Selling) Regulations 2000 and the Consumer Protection (Distance Selling) (Amendment) Regulations 2005. These set out the rights consumers have when making purchases over the Internet. An overview can be found here:

http://www.tradingstandards.gov.uk/cgi-bin/calitem.cgi?file=ADV0051-1111.txt

The European Union’s Directive on Data Protection came into effect in October 1998. As drafted, it had the effect of prohibiting the transfer of personal data to non-European Union nations that did not meet the European “adequacy” standard for privacy protection. While the United States and the European Union share the goal of enhancing privacy protection for their citizens, the United States takes a different approach to privacy from that taken by the European Union.

In order to bridge these different privacy approaches and provide a streamlined means for U.S. organizations to comply with the Directive, the U.S. Department of Commerce, in consultation with the European Union, developed a "Safe Harbor" framework. The Safe Harbor satisfied the EU’s needs for data protection, while allowing U.S. firms to transfer data electronically back to the United States. Companies that wish to transmit private data from the EU to the U.S. should evaluate, and then join, the Safe Harbor. Information about the Safe Harbor can be found at: http://www.export.gov/safeharbor/.

There is a special scheme for non-EU companies selling ‘downloadable software’ via the Internet to clients within the EU. This type of transaction is classified by the EU as an “electronically delivered service”. Non-EU companies selling downloadable software to EU customers must be registered for VAT in at least one member state within the EU. There are different requirements for accounting for VAT depending on whether the customer is a corporation or an individual, and depending on where the customer is physically located. This is a complex subject and companies should either engage an accountant to advise them or ensure that they are familiar with the regulations.

There are some restrictions on general advertising. In the UK, the ‘watchdog’ for advertising is the Advertising Standards Authority (ASA). The ASA is an independent body set up by the advertising industry to police the rules laid down in the industry’s advertising codes. The advertising codes are drawn up by the Committee of Advertising Practice (CAP), and are in place to protect consumers and create a level playing field for advertisers. For more information visit:

The ASA: http://www.asa.org.uk/asa/
The CAP: http://www.cap.org.uk/cap/codes/cap_code/

Comparative ads are allowed, but they must not be disparaging. Advertising to children is more closely regulated. The general rule is that special care should be taken when promotions are targeted at children (people under 16) or when children may see ads intended for adults. It is possible to use prize giveaways, etc., as incentives. Promotions with prizes including competitions, prize draws and instant win offers are subject to legal restrictions. Promoters usually seek to avoid running illegal lotteries by running skill-based prize competitions (often using tiebreakers to identify the winners) or by offering free entry if the chance-based prize promotion might encourage purchase.

Almost all UK based online businesses allow the customer to use a credit or debit cards. Visa and MasterCard, are almost universally accepted. American Express, Diners Club and JCB less so. Discover is not accepted by UK clearing houses. Many websites use Pay Pal or other similar services. UK consumers are becoming much more aware of the issue of online identity theft and will generally only conduct financial transactions on secure websites (https).

Internet transactions are recognized as legal sales contracts, although the Consumer Protection (Distance Selling) Regulations, and amendments, cover consumer rights, especially post purchase. An overview can be found here:

http://www.tradingstandards.gov.uk/cgi-bin/calitem.cgi?file=ADV0051-1111.txt

The EU law concerning electronic and digital signatures takes the form of the 1999 Electronic Signatures Directive. In the UK, the relevant laws implementing the legislation are the Electronic Communications Act 2000, the Electronic Signatures Regulations 2002, and the Electronic Commerce (EC Directive) Regulations 2002 Electronic Communications Act 2000: Section 7 of the Electronic Communications Act 2000 makes clear that electronic signatures, supporting certificates and the processes under which such signatures and certificates are created, issued and used can be admitted as evidence in court. The court will decide whether an electronic signature has been correctly used and what weight it should be given. In disputes where, for example, electronic signatures are fraudulently created, or where people deny having signed payments, the electronic signature and supporting certificates can be supplied as evidence to the court.

Section 7 does not affect any contracts that businesses already have in place regarding electronic communications. Nor does the Act mandate the use of electronic signatures, or specify particular formats or methods. The legislation aims to be technology-neutral and covers all types of electronic signature, from those based on e-mail exchanges to those using public key cryptography or biometric techniques. For more information, please visit: http://www.dti.gov.uk/files/file9980.pdf.

These regulations provide a framework for the definition and issue of electronic signatures, including the supervision of certificationservice-providers and outlines their duties and liability. The main point is that an electronic signature (or advanced electronic signature) would be uniquely linked to the person signing via a certificate (or qualified certificate) issued by a certification-serviceprovider, and tied to the data that is signed, such that any subsequent change in the data is detectable. Electronic signatures can come in many forms, ranging from a typewritten name to a signature created by crypographic means. For more information, please visit: http://www.dti.gov.uk/files/file34340.pdf.

UK consumers may buy goods freely over the Internet from overseas suppliers (with the exception of certain prohibited goods such as firearms, illegal drugs and the like). As long as the correct paperwork accompanies the goods, there should not be any undue delay in the purchase clearing customs. The shipping company will often contact the purchaser to arrange any payments due for import duty and VAT prior to the goods clearing customs. When goods are imported into the United Kingdom from a non EU territory, duty (at a variable rate) and VAT (currently 17.5% for most goods) is payable by the importer. However, due to an EU regulation designed to reduce the cost of tax collection on small consignments, an exception is made on shipments where the total value is less than £18. This is an administrative relief known as Low Value Consignment Relief or LVCR.

It can be set between 10 and 22 Euros by individual member states of the EU. The UK set the limit at its maximum level. Special rules apply to excise goods i.e. cigarettes, tobacco, alcohol, etc, where the duty payable is much higher. Web seals and trust marks There is no national scheme. However, the UK government endorses TrustUK. TrustUK is non-profit organization aimed at boosting consumer confidence (http://www.trustuk.org.uk/). The government offers general advice for consumers at the following website:

http://www.consumerdirect.gov.uk/before_you_buy/online-shopping/

Trade Promotion & Advertising

While trade promotion practices in the UK are similar to those in the U.S., printed materials prepared for use in the U.S. market may need to be modified for use in the UK to account for local legal, cultural, spelling and other differences. In addition to advice that the U.S. Commercial Service offers, local advertising agencies and marketing consultants can provide appropriate professional guidance. Also, the Advertising Standards Authority, an independent body set up by the advertising industry, oversees the practices of the advertising industry and enforces the provisions of the British Code of Advertising Practice (CAP). Advertisers should become familiar with CAP recommendations. The link to the Advertisers Standards Authority and the CAP is as follows: http://www.asa.org.uk/asa/codes/cap_code/

Pricing

Import prices should be based on the landed cost, including value added tax (VAT), which is payable on entry into the EU. The basic “mark up” formula is cost, insurance, freight and duty, plus VAT of 17.5% levied on the aggregate value; this sum is the exporter’s “landed cost, duty paid.” End-user pricing should include local storage, delivery, sales and support costs, as well as the profit for distributors, wholesalers and retailers. The formerly practiced “Resale Price Maintenance”, where manufacturers set a mandatory retail price and prevented retail discounting is now illegal. However, exporters should examine the prices of competitive products or services at the end-user level to ensure that their offering is valued and priced correctly, and that margins, after all the above costs, provide an adequate return for the business. Traditional pricing methods have led to the acceptance of higher prices and profit margins than is customary in the U.S., because the UK market for any product is generally smaller than that of the U.S. The cost of sales in the UK is recovered from the smaller sales volume, and the local vendor generally bears the expense of promotion and support.

Sales Service & Customer Support

There are independent after-sales, warranty and product servicing organizations in the UK. Most specialize in a single business sector, but a few major firms operate nationwide, providing a comprehensive maintenance and facilities management service. The leaders in this sector are Serco, Jarvis, AMEC and Planned Maintenance Ltd. The smaller service companies that provide local coverage can be identified from business directories, the Internet, and from listings held by local trade associations.

Protecting Your Intellectual Property

Creative industries relying on Intellectual property are a key component of the UK economy. According to the UK Department of Industry and Trade, they account for 8 percent of the UK’s GDP. The music industry accounts for 130,000 jobs and the film sector includes an addition 50,000 employees. The UK government recognizes the importance of protecting the intellectual property of its citizens and fighting IP piracy. The UK’s Entertainment and Leisure Software Publishers Association estimates that over £2 billion is lost every year by UK industry to games software counterfeiters. The British Phonographic Industry reports that in the UK alone, commercial piracy grew by 81 percent between 2002 and 2004.

In 2003, as part of the UK government’s Innovation Review, the UK Patent Office was charged with developing a new strategy to combat IP crime. To accomplish this, the Patent Office established an IP Crime Group in 2004, bringing together law enforcement, customs, and IP stakeholders. The IP Crime Group was charged with:

• Bringing together government policy-makers, industry stakeholders, and enforcers, to create a coordinated approach to intellectual property enforcement;
• Establishing a strategic and tactical picture;
• Identifying areas of threat and specific harm;
• Supporting training for enforcement officers;
• Bringing together local, national and international partners; and
• Raising consumer awareness.

The IP Crime Group published its first annual enforcement report in 2004. The report, while pointing out weaknesses in its methodology due a lack of information, found that over 50 million counterfeit items worth £534 million had been seized in the UK in 2004. Anti-counterfeiting operations have taken place with the cooperation of law enforcement and industry organizations.

The UK also established a Creative Industries Forum, chaired by the Arts and the Science and Innovation Ministers. Like the IP Crime Group, it has stakeholder representation from such sectors as film, music, publishing, design and computer programming. The Creative Industries Forum also has representatives from Internet service providers, telecommunications companies, computer manufacturers and consumer groups. The Forum established three working groups on education and communication, business opportunities, and IP crime and on-line infringement. The UK legal system provides a high-level of intellectual property rights (IPR) protection.Enforcement mechanisms are comparable to those available in the United States. The  UK is a member of the World Intellectual Property Organization (WIPO). The UK is also a member of the major international intellectual property protection agreements: the Bern Convention for the Protection of Literary and Artistic Works, the Paris Convention for the Protection of Industrial Property, the Universal Copyright Convention, the Geneva Phonograms Convention, and the Patent Cooperation Treaty.

Under the Patents Act of 1997, a patent application requires that an invention must be new, involve an innovative step, and be capable of industrial application. A patent cannot be granted for any invention used for any offensive, immoral or antisocial purpose, for any variety of animal or plant, or for a biological process used in its production.

The Copyright, Designs and Patents Act of 1988 grants the originator the exclusive right to assign these rights or to exploit them through copying, dissemination, publication or sale. Computer programs and semiconductor internal circuit designs are included as works that are protected by this Act. Under the terms of an EU Directive, which took effect in January 1998, databases are also protected in each EU-member country by the national legislation that implements the Directive.

The Trademarks Act of 1938 prohibits the use of a mark identical to, or nearly resembling a trademark registered by another person or legal entity. A trademark may be removed from the register if a period of five years has elapsed, during which time there has been no bona fide use of the trademark in relation to the goods by any proprietor. A trademark may be registered within more than one class, the registrations being associated or linked. The same trademark may not be registered by more than one company, irrespective of the number of classes in which it is registered.

Commercially sensitive information is not itself specifically subject to legal protection, but the misappropriation of such information from business premises may be subject to criminal law. Action under employment law may also be taken against an employee who, by disclosing information, breaches a contract with his or her employer. In addition, confidential test data, submitted in conjunction with a registered application for pharmaceuticals or veterinary products, enjoys ten years of exclusive protection from the date of authorization, provided the product is marketed in the UK.

Common law prevails in the UK as the basis for commercial transactions, and the International Commercial Terms (INCOTERMS) of the International Chambers of Commerce are accepted definitions of trading terms. Accounting standards and audit provisions used in the UK are the SSAP Standards of the Accounting Standards Board (www.asb.org.uk). U.S. exporters and investors will find little or no difference between the United States and the UK in the conduct of business.

Due Diligence

Banks, accounting firms, credit agencies and risk management companies provide a full range of reporting services that U.S. companies can use as part of their due diligence before signing a local partner. Service providers include the UK subsidiaries of the American-owned Dun & Bradstreet, Equifax, and Infocheck. The U.S. Commercial Service provides International Company Profile (ICP) background checks on UK companies that can be a valuable part of a U.S. company’s wider due diligence process.